Shares of oil-and-gas producer and transporter Encana (ECA) were tanking on Tuesday after plans surfaced to issue 107 million shares to raise a much-needed $1 billion.
Much of the problem is that as Encana looks to tap the Permian Basin in Texas with about half of the funds, the other half will go toward debt repayments. And it's beginning to appear Encana's found itself in quite a deep hole when it comes to its debt-to-earnings ratios. (Encana is a member of Real Money's Stressed Out watch list.)
Encana last reported about $5.7 billion of debt in its second-quarter earnings vs. about $253 million of EBITDA, equating to a precarious leverage situation of about 22.5x. (EBITDA is a standard valuation metric standing for earnings before interest, taxes, depreciation and amortization.)
In supporting their Outperform rating and $12 price target, analysts with BMO Capital said on Tuesday that the funds could meaningfully help grow production in the Permian Basin through adding new rigs and that Encana could double the amount of Permian wells "in stream" next year vs. 2016.
"This is a blank check" for Encana, Real Money's Jim Cramer also noted of the company's growth potential in the Permian region in a Tuesday CNBC "Mad Dash" segment.
As analysts with RBN Energy noted in a recent report, the Permian is clearly the hottest region expected to spur growth once the so-called Shale Revolution resumes. RBN notes that 11 of the top 20 counties for drilling activity are in the Permian, representing about a third of all operating rigs.
Encana shares were down about 7% in midday trading and are up about 80% so far on the year.